Colonial SFL, Socimi S. A. (COL) Earnings Call Transcript & Summary

Welcome to Inmobiliaria Colonial First Half 2021 Conference Call. [Operator Instructions] I'm now pleased to introduce Mr. Pere Viñolas, CEO of Inmobiliaria Colonial.

Thank you. Good afternoon. This is Pere Viñolas speaking. Together with me, as usual, Carmina Ganyet, Corporate Managing Director; and Carlos Krohmer, Chief Corporate Development Officer. I am on Page 6 of the presentation for today. And as usual, I will start the highlights. We are presenting today, first of all, what we believe is a strong first half results. The net tangible assets, the ERPA NTA for this first half is EUR 11.36 per share. The net reinstatement value EUR 12.33. That means that the NTA growth is 3% total return in 6 months. Our group net profit is EUR 162 million, which is EUR 188 million more than last year because, last year, at this time, we were experiencing a loss. Our GAV has been growing at a 3% like-for-like, 5% in the case of our Paris exposure. Our net rental income has grown 2% like-for-like. And our EPS is EUR 11.14cts for these 6 months, as we explained previously, mainly related to disposals and renovations program that we've gone through if it wasn't for the effect of these disposals, our recurring EPS like-for-like would have been EUR 16.37cts in line with the previous year. I will go later on into details about this. But basically, I would like to highlight in the first place that the main driver of this result is a solid operational performance, particularly our letting volume remains as strong as we saw in the first quarter, with volume with experience in the second quarter the total letting volume of this first half of the year is up 42% versus previous year. As a consequence, our office occupancy remains where it was, 95%. And this strong volume in our letting activity is also matched by strong rental growth. at the end of this year -- of this half year, our release spread average release spread is 14%, and our growth rental growth compared to December 2020 ERVs is 6%. So, it's the volume and it's also the rents that show a very good performance in this first half of the year. Additionally, our capital recycling with flight to quality, which is a strategy that is going through in the last few years, adds an additional layer of value. We have completed our disposal program with double-digit premium on GAV. We have increased our exposure, or we are about to increase our exposure in prime barriers in excess of EUR 1 billion through Alpha VI, that is through our transaction regarding SFL. Also additional value is being created through a successful liability management regarding our debt, which allows for a lower coupon as compared to historical ones, while our balance sheet remains quite strong with an LTV of 34.6% and, in addition, EUR 2.4 billion of liquidity. In Page 7, you can see this data with more detail. Mainly the messages would be that, if you go through the performance of each market in terms of capital value growth, all markets we are in are experiencing similar performances. Paris is growing 2% like-for-like GAV in the last 6 months, Barcelona 4%, Madrid 3%. In the Page 8, you can see also this breakdown for the gross rental income. You can see that an average 2% year-on-year has -- is based on Paris growing 3%, Madrid 0.4%, and Barcelona minus 0.6% in terms of gross rental income, a similar picture in terms of net rental income. If we have a look at the release spread or the strong rental growth, we can see various patterns. But if we look at the strong rental growth, it will be a little bit higher in Paris than Madrid and then Barcelona. So we will now go into the details. But basically, it's been 6 months of a very good activity in terms of letting volume, very healthy rental growth. As a consequence, good occupancy in line 95%. As a consequence, good growth in terms of GAV on like-for-like terms, 2%. As a consequence, also, good growth in terms of NAV, reaching this new level of EUR 11.36. We are going through a phase, as we've explained before, of weaker earnings per share, which is mainly due to the divestments we've gone through in recent years and months. But this is part of our strategy, which is mainly to focus on value creation, and we will see already a little bit the outcome in these results, that is, as we have a lower profit because of the divestments, we have more value creation as opposed to last year, which, in the end, is our focus. This will be the introduction of what we've gone through. Now we enter into the details, and I hand over Carlos Krohmer to go to the next part of our presentation.

Thank you very much, Pere. I will start, as usual, with markets. I'm on Page #10. When we look at the 3 markets where we are active, the 3 markets are starting to have recovery in take-up and have a very limited supply of Grade A product in the CBD. Going market by market, Barcelona has had more than 110,000 square meters in the first 6 months of this year. This is a 42% year-on-year increase. Interesting element about this that 72% of this take-up is in transactions that are concentrated in CBD and technological CBD/22@. So as a consequence of this and this scarcity of prime product, the prime rents remain at EUR 27 per square meter. In Madrid, take-up has been 160,000 square meters, 7% above previous year, concentrated in technology and consumer goods companies. Here, it is probable that we could see some sort of acceleration in the second half. But still, the first half is -- even though it's above previous year, it's not yet at normalized levels. In the CBD, things are quite strong and healthy. A little bit of rental pressure outside the M30. And finally, CBD in Paris and Paris market in general. First of all, the Paris take-up has been at 700,000 -- more than 700,000 square meters. This is a growth also versus the previous year. Interesting to look at the CBD take-up that has a 30% year-on-year growth. There, the prime rent is EUR 920 per square meters, that is above the prime rent 1 year ago. We go to Page 11, we see the investment markets. Barcelona has reported year-to-date in terms of investment volume, EUR 700 million of deals together with the things that are now on the analysis in the market, not by us, that are in the market. It seems that we could get early to EUR 1 billion. So this first half, there has been a lot of activity in the Barcelona market. And this investment activity, 80% of this is concentrated on office -- sorry, and this activity is 80% of the total Spanish market. What means this is, at the moment, in Madrid activity has been lower, around EUR 180 million. There, basically, it's a lack of good product in the market because the investor interest is back and is with increasing momentum. Paris has a total investment volume this first half of EUR 5 billion. There has been specific important activity in the segment of assets in the range of EUR 50 million to EUR 100 million of size of 37% year-on-year increase. And also there, the investor interest remains very high. So after this small snapshot of the market, I will quickly go through the main operational news of this first half. I'm on Page 13. As Pere explained, we are closing the first half with 60,000 square meters. This is a 42% increase versus the same period of the last year. We made already, as you know, in the first quarter, around 30,000 square meters. We have again done another 30,000 square meters in the second quarter. It's well balanced across markets and what is here to be highlighted is the good terms that we are signing and especially on this page the maximum rent that we have signed in every market, EUR 28 per square meter monthly in Barcelona, EUR 35 per square meter monthly is the maximum rent we signed the Madrid, and EUR 930 per square meter a year in Paris. Just as a reference, vis-a-vis the prime rents that you have just seen that report the consultants. If we go a little bit more into the detail of the activity then it's -- I am now on Page 14. If we look at the rents that we have signed of the square meters that we have signed. So in economic terms, we are seeing that it's even more activity. So we have signed annual strengths of EUR 25 million vis-a-vis the EUR 16 million we signed in the first half of last year. This is an increase of 71%. What is behind this? What are the contracts that we have signed? All of the contracts that we have signed, 90% of these contracts correspond to assets in the CBD or City Center Paris, so including the Paris 7eme, and our assets with good eco-efficiency and extremely low carbon footprint. All of these assets have an average carbon footprint of 5 kilos of equivalent CO2 per square meter. This is an extremely low ratio. So clearly, you can see it's the Grade A offer that really attracts the demand. On Page 15, we are doing a little bit more zoom on the price levels. As Pere already mentioned, double-digit release spread cumulative for the first 6 months, especially highlight is Barcelona with very high release spreads on the rental growth that we have signed 6% versus the December ERV. It's interesting to see that the second quarter in itself has had 7%, so an acceleration in the second quarter. And in terms of markets, I think what is interesting to highlight is Paris, with plus 11% in Q1, and plus 7% in Q2. And Madrid with plus 10% in Q2 2021. Page 16 is just to show some examples. So it's really spread around the portfolio. On Page 17, you can see the vacancy profile. We have a little bit of vacancy increase in Spain. Madrid is basically the delivery of one of the renovation program assets or they are asset, but we have now interesting conversations. In Barcelona, we have some rotation of clients. On the other hand, Paris has improved because there has been a lot of square meters of available space that have been let up. So as a consequence, we are at healthy 5% vacancy levels. If we exclude Grenelle, that are 2 assets from the renovation program that are delivered from the renovation program, we are just at 3%. If we do another type of analysis that is on Page 18, and we'll make a breakdown out of this 5% where it is located, you can see that roughly 1% is some residual secondary exposure that we still have in our portfolio. Another 1.8% out of this 5 is entry into operations of the renovation program and the rest is a very attractive supply of good assets in the industry. And to finalize this section on Page 19, we have delivered, during this first half, one of the projects of our project pipeline. This has been signed at a very good rent. As you know, when we bought this asset, it was an average rent of EUR 14. Now we have doubled the rent. We signed a 10-year mandatory contract without any break option with the BlueChip Utility Company. So this has done an extremely good risk profile, therefore, we have here through the new product that we created and the excellent contract that we have in place, created yield compression from 5% yield on cost down to 3.5%. This combination, at the end, translates into a 30% capital value gain on the total cost of this project. So total cost means acquisition cost plus the CapEx that we have invested. This is a very important part of our business to gain capital value gain margins on our project pipeline. And with this, I hand over to the financial part to Carmina.

Thank you, Carlos. As usual, in this part, we are going to cover the main financial indicators and the impact in our P&L. In Page 21, the first one is the gross rental income, growing 2% like-for-like, with a very strong performance in Paris, upsetting temporary some corrections in Barcelona basically due to the client rotation. What is behind this increased rent, gross rental income like-for-like? If you jump to Page 22, basically, this like-for-like growth is driven by rental prices. So the group rental price like-for-like is growing 1.6%. And I would like to highlight, especially Barcelona and Madrid office rental prices with a significant increase of 1.2% -- close to 2%. If looking at gross rental income, we look at the net rental income in Page 23. Again, the increase of the net rental income is 2% especially in Paris with 5% net rental income. And of course, this positive like-for-like growth in Paris is offsetting the temporary correction in Barcelona, as you saw before, due to some vacancy due to the fact that we have some renovation from upcoming operation and some clients' operations. Another important financial driver that is impacting our P&L is the evaluation, the updated valuation. I am in Page 24. And the updated price shows a solid 3% year-on-year, like-for-like growth, with a significant outstanding number in Paris, with 5% like-for-like, year-on-year growth and a significant very strong performance of the valuation in the portfolio in Barcelona and Madrid in the second half -- sorry, in the first half of the year 2021 with 4% in Barcelona and 3% in Madrid. And what are the main drivers of this capital value growth? In Page 25, you see the split of this 2.3% like-for-like capital value growth in the last 6 months of the year. And basically, Barcelona, Madrid accelerating the Greece with 3% in Madrid and 3.5% in Barcelona. A significant also impact, thanks to the value creation and all the Prime Factory deliver that has been also coming into operation in the first half of the year adding in our capital value growth is 2.2%. So as a summary, in Page 26, you see how our P&L accounts look like. So the gross rental income shows a figure of EUR 155 million, of course, below the ones that we show -- we were showing in the first half of the year basically due to the acceleration of the renovation programs and due to the significant amount of the disposals of mature and nonstrategic assets of more than EUR 600 million. These numbers are showing also the impact on the recurring EBITDA with EUR 122 million and with a recurring earnings of EUR 57 million. Below the recurring, you have a very positive impact of the asset revaluation of close to EUR 150 million. We are aware that last year it was negative, with a minus EUR 105 million. So a very important capital growth impacting positively in the first semester. And then in nonrecurring items, you have -- we have, in the first semester, an impact of the liability management that I will describe later on, which has been impacted in the extraordinary items in the first half of the year. But in exchange of that, adding additional positive recurring for the following years. So the profit attributable to the group is EUR 162 million, a very significant growth related to -- or compared to the first half of the year of last year in 2020, which was negative. If we compare the recurring earnings as a comparable terms. So comparing that the profit or the recurring earnings that we would have, if we wouldn't dispose the assets or we wouldn't have the accelerating program, basically, you can see a flattish number, slightly above than it was last year. So our recurring is more quality recurring earnings due to the quality of the assets that we have today in the portfolio. And of course, later on, you will see the potential growth of the recurring earnings thanks to the -- all the project pipeline and the renovation program and the release spread. A reminder about the dividend per share. We have increased our dividend 10% from EUR 0.20 last year to EUR 0.22 this year. And the same number translated to in comparable terms, the EPS. Our EPS in comparable terms would remain flat to slightly positive at EUR 16.37 cents per share. And due to the disposals, as I mentioned, the recurring earnings per share shows a figure of EUR 11.14 cents per share. To analyze this comparable recurring earnings in more specific terms, you can see here the positive impact of our EBITDA like-for-like, EUR 3 million. Some of impact, so this EUR 83 million would be the comparable recurring earnings in the first half of the year. And then you can see very specific numbers here about what has been impacted all our strategic decisions about flooding secondary assets, going to more for quality asset base and accelerating the renovation product. If we go to the liability part of our balance sheet, I am in Page 28. This first half of the year, we have done a very significant work improving the debt profile through successful liability management. We have been issuing 625 million bonds, 8 years maturity, with a very significant acceptance from the bondholders, 3x over subscription. And the placement of this bond has been in a very, I would say, interesting terms for the company. It has been the lowest coupon in the history of Colonial, with 0.75% of coupon for the following 8 years. So as a consequence, you can see here how we have improved the debt profile. So we don't have a very significant maturities of debt during the following years. Also, we have an average maturity of 5 -- more than 5 years. So we have increased the profile of our debt. And with today's spot, cost of debt of EUR 1.61 million. In the next page, you can see how we have strengthened our balance sheet profile of our capital structure. So today, we have been reducing since 2018, more than EUR 300 million, with a loan-to-value today with a very healthy levels, confirming by S&P, by Moody's, the investment grade, with a very stable outlook, below 34% loan to value, a very significant liquidity position of more than EUR 2.4 billion, improving maturities, strengthening the capital structure. So we are, I would say, in a very good and healthy position to face good opportunities in the future. And finally, in Page 30, you can see here, what has been our total shareholders' return in this first part of the year. So basically, close to 3%, adding the dividend that has been distributed. And if we look at these last 12 months, the total shareholders' return, increasing the net total assets and dividend per share, it has been more than 3%.

Thank you, Carmina. So before entering to the next session about strategy and value creation, just a quick word on ESG. Basically to express our new commitment to the achievement of the most ambitious targets in this field. And basically here, the message that we would like to share with you is that at this time of the year, what we see regarding our objectives in terms of ESG and in particular, in terms of carbon footprint reduction is that we have been achieving our targets, our goals before we expected in our previous plan. We expected to reduce 75% our carbon footprint emissions between 2015 and 2030. Now what we see is that this target for 2030 has been achieved ahead of timing, and therefore, we will be seeking more ambitious returns for the immediate future. We've remained so very committed to the best standards in this direction. And maybe the other, let's say, additional news that we would like to share with you is that we've been working in this month in our advance to the Science Based Target initiative. So that will be an additional layer of fulfillment of delivery regarding our decarbonization objective. Having said that, a final section on value creation, so more forward-looking. How do we feel that Colonial may deliver additional value, additional growth in the future. We are -- we remain quite confident in our capacity to deliver additional value for the shareholders in the future because we are relying on a number of different sources of value creation. On Page 35, first, a comment on our project pipeline. As you know, our project pipeline consists of 9 different projects that are equivalent to almost 200,000 square meters, where the total cost to be invested is EUR 1.26 billion. And here, the message is that we've gone through most of this. We have a remaining CapEx of around EUR 300 million. But basically, we are getting closer and closer to the return on this with -- which can be translated into almost north EUR 80 million of additional revenue. And as quarters go by and we have additional progress in this field, the more close we get to this value creation source. As of today, regarding these 9 projects, we have already delivered the Diagonal 525 the #1 project in Page 35. But we are in the final stages regarding 83 Marceau, which is going to be delivered in the next few weeks. And we are having substantial progress in all of the different targets of this pipeline. On top of this first driver, we have another important driver, which is our renovation program. Our renovation program is deployed among 9 different assets between Spain and France, which account for slightly more than 100,000 square meters. And there, we believe that this can deliver approximately EUR 36 million of additional rents. So this would be another driver where we're working on, on top of the value that is coming from the project pipeline. And third, the assumptions that we are doing regarding our existing portfolio, telling us that the reversion potential that we have in our existing portfolio, that is the rents that would come in from the difference between the existing rent that we have in the contract and existing spot market rents. That allows for another buffer of additional rents, which would account in excess of EUR 20 million. On top of that, as you know, we have been working on the SFL transaction, which means additional exposure, I'm on Page 38, of approximately EUR 1 billion of additional exposure to prime assets in Paris. That is mainly what describes our Alpha VI projects that you can see on Page 39. So basically, the message that I would like to emphasize is what you can see in Page 40. As of today, Colonial, it's a company that is delivering EUR 335 million of passing rents. And despite whatever may happen on top of that, only working on what we have already in-house. We are prepared to deliver EUR 150 million of additional rents. Out of this EUR 150 million of rents, approximately EUR 77 million, that is between EUR 75 million and EUR 80 million, would come from our first driver, which is our pipeline. And moreover, out of these EUR 77 million, EUR 25 million, as you can see in this chart, are already secured, EUR 52 million are remaining. Our second driver would be our renovation program that together with other minor refurbishments that we are going through within our portfolio, we'll be delivering EUR 48 million in the next few years. And finally, the third driver, which is the reversion potential of our portfolio, would allow for additional EUR 26 million. We are always talking in steady terms, that is in today's spot prices, that is without including any assumption regarding growth, regarding CPI or regarding our ability to generate additional income through acquisition. So the message is that only through our internal capacities, we are already in the position of delivering substantial value through substantial additional rental income that would be added to our income statement in the next few years. On top of that, I think that it's well known by everybody that these days, we are going through a situation in our markets where you see a lot of pressure from additional money that wants to be invested. And this is particularly happening in prime assets. We are clearly experiencing a polarization of our market between Prime CBD assets and secondary assets. Prime CBD assets are showing a better performance in terms of letting activity, but are even more showing a better performance in terms of investment market. And related to this, in Page 41, we can provide the usual because we provide always this number comparison between the valuation yields for Colonial implied in our appraisals. -- compared to the Prime CBD markets. And in Barcelona, Madrid and Paris, you can see that there is a substantial gap between what's happening in the market and what is implied in our valuation. And you can look at this in terms of valuation yields or you can look at this in terms of spread valuation yields, which is what you can see in the middle of this page 41. Or finally, you can look at this in terms of comparison between the capital value per square meter that it's coming from our uprisals compared to where the market is today. So as a conclusion, first of all, we've had very satisfactory results for this first half of the year. We have delivered positive like-for-like growth in terms of gross asset value, GAV, 3%. We have provided growth in terms of like-for-like terms in the net rental income of 2% also. And mainly this is related to a very powerful activity in our operation -- on our operational side. As I said, the letting volume for our company is going quite well. We finished the first quarter with 30,000 square meters signed mainly related to our activities in Spain. At that time, Paris did not show this level of strength. At this moment, when we end the second quarter, tariffs, or to be more specific, our activities in Paris have clearly taken off, are showing impressive volumes, and we finished this quarter with totally -- total 60,000 square meters of volume, which is 40% more than last year for the same period. On top of that, as I said before and as has been explained by Carlos and Carmina, our rents are higher at a higher level, 6% higher than December last year. And all of this has a consequence in occupation, which remains at 95%, on GAV growth, as I said, 3% like-for-like, then also on net rental income growth, 2%. And finally, on the net asset value that remains slightly up after having paid our dividend. So looking backwards, the results are satisfactory. Looking forward, we remain confident on the value drivers that we have inside the company. So we remain quite confident about the evolution of the company, when, of course, we have to deal with a difficult environment in terms of the COVID crisis that is still a little bit with us. Basically, one of the main drivers for this good evolution is our focus on a Grade A, our focus on CBD that allow us for returns coming from this scarcity play. Also, the investment market is helping with a strong momentum. My final comment would be that, at this moment, at this time of the year, the visibility we have allows us to confirm the guidance that was provided previously that is between EUR 0.22 and EUR 0.25 for the end of year. And, more importantly, I would say, EUR 0.27 to EUR 0.30 per share for 2022. This has been the presentation of our results. Now we are available for any questions you may have. Thank you.

[Operator Instructions] The first question comes from Florent Laroche-Joubert from ODDO ABF.

So thank you very much for the presentation. I would have several questions, so if I may. Maybe the first one on the SFL transaction. So I understand that we could expect that the most minority SFL shareholders will accept your foreign exchange the SFL share against Colonial shares plus cash. So do you confirm that we can be positive on this transaction? And so if we assume that, for example, 100% of minority shareholders or maybe 99% of SFL shareholders accept the offer, does that mean that you should be able to -- maybe to upgrade your guidance because there will be less minority interest to be recorded in the P&L? So that would be my first question. My second question would be -- is it possible maybe to have an outlook on office market in Madrid and Barcelona for H2? Do you think that it will be also dynamic? And my third question would be -- so it's possible to have maybe more color on the leasing process for 2 projects of your pipelines in Spain, So Miguel Angel 23 and Velazquez 88 please?

I will comment on the first one, and then Carlos may step in with the other 2. First of all, just to update on our transaction on SFL, this has gone very smoothly through the goals, the targets on the milestones that we expected. And based on that, on July 20, the IMF approved the transaction. Next step would be tomorrow, it's the end of the process according to French law for potential comments coming from third parties. And based on that, we expect, at the beginning of August, the start of the offer that would take place during the month of August to be finalized, 25 August, and then final execution will take place in September. Well, obviously, we believe that the beauty of a transaction for any SFL minority shareholder, it's quite obvious or quite relevant. We have made an offer, which implies a very significant premium on the stock price. It is true that also at a discount to NAV. So it's a win-win for Colonial shareholders and SFL shareholders. And it is also true that this weakness on the stock price of SFL has to do with any liquidity that is structural that has always been there. So we are fixing something that has been a structural problem for SFL minority holders, and therefore, we believe that we are providing a solution that should be very compelling and very, I must say, positive to all SFL minority shareholders. Having said that, of course, we cannot do any assumption on how many of the remaining shareholders, at the free float of SFL level, may accept the offer. There may be a number of things to consider for them regarding their portfolio, individual portfolio management. So we don't do any assumptions. Anyway, what I would say is that, I would not accept significant changes in our guidance depending on the acceptance rate. The numbers we've done, we don't believe that will play a major role in this, no. But the rest of the questions, maybe, Carlos, if you want to step in?

Yes. Regarding the dynamics of the Madrid leasing market, there are some things -- not all of the things of the market, you can see it in the figures. What we are experiencing right now, I would say, since May, June is the relevant pickup of activity, of visits, of transactions in Madrid with a very, very strong dynamic. We have also several things under negotiation at the moment. So the most probable thing to happen if we have not some strange evolution, again, with the virus or with the pandemic, is that we should see an acceleration of activity in general in the leasing market in Madrid because the data that we have and the experience that we have regarding visits is clearly showing this. And this leads me directly to the second question. As you correctly point out, we have 2 assets, very nice assets in the Madrid CBD that's going to be delivered by the end of this year, Miguel Angel and Velazquez. We are having good momentum on both. We're having the interest on the market, and we will have to wait until we can really then announce something. It would not be very prudent or wise to now give a very specific guidance on expectations, something specific. We are having the conversations. So let's see if we can disclose soon something, but we are quite positive because of the asset that they are unique and the activity in the Madrid market that is improving. And hopefully, also, in general, after the summer, we will start to see a more stronger rebound out of COVID.

The next question comes from Jonathan Kownator from Goldman Sachs.

It's just an extension of the question of Florent, just to understand how you're doing in terms of pre-leasing some of the projects that you have, you have a pipeline of refurbishment, I appreciate you've commented on 2 projects specifically, but if you could elaborate on the rest of the pipeline and the refurbishments that would be great?

Well, I think on the project pipeline, I think there is not already said by better. You know the elements that are pre-let, we're going to have, soon, the really entry into operation of Marceau. So back after the summer, we would see then there maybe a little bit, some weeks in advance of what we initially expected the entry of operation, and therefore, the P&L revenue impact starting from Marceau. I think this is what we can say at this moment about the project pipeline. Regarding the renovation program, I think the interesting element is that out of the EUR 36 million of additional rents, as of today, we have secured already EUR 5 million in half a year, in 6 months, we -- even less, we announced this in March, again, we put, again, some focus on this in March, we have secured EUR 5 million. However, a part of this -- a relevant part of this are renovation projects in Paris that start now, and that will take some 12 to 18 months. So I think the good news is these are, in a way, pre-let, but they're not going to flow now in the next month into our P&L because now the renovation projects start and have to be completed. And then we have Ortega y Gasset, this has been just released there, again, would apply to comment on the Madrid market. There's interest in the Madrid market. We are receiving visits. But see if we can come soon with some news and some other parts will also come into operations. So at the moment, we are not quite positive, but we have nothing specific at this moment that we could disclose.

Understood. What about Biome? Have you started commercialization of the asset yet? Or are you starting the second half of the year?

Just now, Jonathan. So we are just starting now in September to the consolidation. So we are very curious to see the kind of feedback that we'll have from potential clients. We are very confident because of the quality of the product, but still too soon for us to have visibility on this. And the 3 great projects in Paris, Marceau has already delivered Louvre St. Honore. Also, for us, it's the next challenge. I think that the French team is doing a great job, but we won't see any feedback before the last quarter of this year.

The next question comes from Pedro Alves from Caixa Bank.

Two questions, please. The first one, if you could share your outlook for vacancy in your portfolio, namely the expected time line in your budget to occupy Ortega y Gasset in Madrid regarding the tenant rotation in Barcelona. If we're having any advanced negotiations with new tenants to recover the vacancy at least back to more normalized levels? And the second question is regarding our investment strategy. What is now your rationale and what is your pipeline of opportunities after the takeover bid for SFL? Should we expect you to prioritize new, I would say, your traditional Prime Factory projects? Or would you prefer to keep going on with this renovation programs on your existing assets?

Yes. I will provide a couple of comments, and then Carlos may step in. Well, first of all, regarding vacancy to be at 95%, it's quite a good level. I think that if you look at the historical data that sometimes we provide for the last 20 years, 95% would be the usual number. So we are pretty satisfied with this number. On top of that, if we go -- we dig into the details of this 5%, I would say 2% are related to CBD assets that has been certain rotation of clients, but where we are confident. I'm talking about assets like DAU in Barcelona, like Diagonal 682 that we already having discussions. We are not -- we don't have a particular concern on that. Another 2% out of this 5% is coming from products, in assets that have just been delivered. So -- but we are having already discussions in some of them. And finally, there's a 1%, which is tougher because it's related to secondary assets, to assets in more tricky locations. So of course, we may have additional bad news, you never know. But when you look out onto this 5%, I think that is a share out of this 5%, which is on the good side, let's say, that should be delivered in due course in the next few weeks or months. And the second comment I wanted to make is regarding our general strategy of value creation and additional investments. The way we feel about is this, number 1, I don't know if the word to say that we are relaxed. We are not relaxed or that we are confident, but the fact that we can create growth without having to buy whatever in the market, that is something that is providing some comfort, and we are working on 200,000 square meters on the pipeline, another 100,000 square meters on the renovation program. And we try to show today how much many -- how much money is coming from this in terms of rents. So this is our base case. Then on top of that, the -- what we do is that on a regular basis, we are looking at any opportunistic investment that can be there. Opportunistic, meaning that we always look at this kind of off-market transaction that create value, that have a level of real estate skills attached to that, that maybe is too much from some financial investors. And in any weekly investment committee, I would say that we are looking at 3, 4, 5 things. What we are not doing is relaxing our investment criteria. So it may happen that we do 1, 2, 3, 4 investments per year, then we do more, then this, and we do less than that, but I would say that this kind of machine is working at its usual speed and deliver results as usual. On top of that can we create anything else coming from, let's say, some more nonorganic kind of acquisitions, coming from any other kind of, let's say, more creative site? Well, we do our work, which is have a look at anything that may come from the market, but we cannot be specific regarding this. We -- I would summarize in that we know that the market is, today, hotter than usual because of so many investors out there wanting to buy. Everybody wants to buy most of what we own. So this should have a consequence in the evaluation of what we own. That makes it difficult to buy play-in-Manila kind of investments, which we don't do anyway. But on top of that, it remains always there, this market that we try to tap on more complex kind of transactions that we feel that we should be able to deliver. We are, of course, in the middle of pandemic. Sometimes it's even difficult to visit or have the usual contact now with targets. So we have to account for that, but we remain quite confident on this. I don't know if Carlos adds anything, but that would be our answer.

The next question comes from Fernando Abril from Alantra.

A couple of questions, please. Just -- so if I do my math correctly, you are now a bit below of the lower range of your guidance for this year. So there should be a little improvement at least to reach the low end of the guidance for the second half. Where is this growth will come from according to your forecast? And then second question is also because -- sorry, because I might be missing something, but I don't get to your EUR 335 million passing rent because if I get this quarter rent, and I analyze it, I only get EUR 310 million so where is the -- I don't know, the difference come from?

Yes. Maybe Carlos can step in on the second part. On the EPS, I would say that, yes, you're right, we are on the lower end of this range of EUR 22 million, EUR 25 million. But basically, what happens usually is that when you put a number of strategies, they deliver not all of them, starting from the beginning. So there is an effect that usually comes more, let's say, on expanded version on the second half of the year on the first half. And that is telling us that we remain, let's say, with this gap of EUR 22 million, EUR 25 million without any particular bias at this moment. We are at the lower end, but we are in the first half of the year. So usually, the second half, we believe that would allow us to go higher than you can deduct from the first half. On the passing rent, I don't know it's something that you?

Yes, very quick, it's very technical. I will do a comment. And if you need further clarification, you can do a specific call with our IR team.

Okay.

Basically, what you have or the number that you make is when you annualize our first half accounting gross GRI, you come to EUR 310 million-- So you have to take into account that this is the gross revenue of the first 6 months of the year. The figure that we show on Page 40, 4-0, is as of balance sheet date 30th of June, what is the passing cash flow of our contract portfolio. So it incorporates all of the things that we have been signing during the first half of the year, but that, obviously, they are being signing during the year, they have no annual impact in the accounting figures. So it's in a way some sort of anticipated indicator where the P&L gross revenue is going to go to. This is what we, today, have already at cash at hand in our contract portfolio, but that are not fully reflected in the 6 months because they are not fully there. And this is the main difference, and there are some other smaller technical issuance, but this is in a way guides you what can come immediately going forward.

The next question comes from Ben Richford from Societe General.

Just a question on your point around the polarization in your markets accelerating between Prime CBD and the rest. How far do you think that can extend? Can you project out a little bit for us? Can you envisage a market where Prime CBD rents, let's take Paris in particular, grow modestly, whereas secondary continues to fall over consecutive years? That's the first question. And then what is the sort of return premium you look for if you're assessing acquisition opportunities because, clearly, this bifurcation could throw up some opportunities in these sorts of assets you don't currently own, but the more value-added secondary space? So that's my 2 questions.

Thank you. It's a very interesting question, a very important question. I would like to start with some qualitative, let's say, comments. Basically, what we are experiencing from our [ secondary ] potential clients is that when they look at the current situation and how they feel about the future, of course, they consider that flexibility is something that has to be factored in to anything they do. Of course, working from home may play a certain role. But -- last, but not least, the clients are more and more conscious about what kind of value they do deliver for their employees in the offices where they are. So they basically are focusing more on what kind of offices do I want. And that's one of the driving forces for our strategy. And I think that in the next week we will be able to provide some specific examples of companies, and what they've gone through what kind of thoughts and where they are. But let's say that a first driver is coming from this qualitative element that has to do with our clients. Of course, then comes the traditional element that the Prime CBD, it's usually attached to much more long-term commitment and loyalty from clients that are looking at some elements less related to pricing, let's put it this way, that play this role. But finally, on the other side of the coin is the investment market. The investment market is in a situation that they feel that they need to invest in real estate, but they are also looking with a lot of, let's say, details at risk. And the risk-adjusted return of Prime CBD is so much better that you simply see so much money, more money in CBD that creates the other difference. Without entering into the details, when we look our history and our performance in this first half of the year, we believe that in terms of value creation, in terms of GAV, it would be, I don't know, maybe Carmina and Carlos, they may come with a number, but we easy to say that 3% to 5% of difference in terms of GAV growth. It's already happening in our -- within our existing portfolio. This, in the short term, in recent months, but also in the long term, we'll have data for many, many years. And that's, let's say, the practical consequence of this polarization in the short term. So I believe that's why we remain so strong in this kind of direction. And as I said in previous presentations, our focus in CBD, it's also based on other kind of ground or rationale. When the discussion on sustainability becomes more and more sophisticated, more and more important will be location access through work in easy and public transport way. So more and more will be evident on that sustainability and CBD are more close and what people think. And of course, as I said before, in terms of the value we provide to clients, the connection between CBD and client retention or client loyalty, that's another reason, which is important. I don't know whether maybe I went too long to answer this, but maybe Carmina, wants to add something.

Sorry to add something. When you look at the market reference and the market data, it shows that the back and see, for example, CBD as Carlos introduced, now on Page 10, you see numbers like 5%, 3%, even if we -- you go to the Grade A asset, it's below 1%, especially in Paris. But when you look at this number in the secondary, this vacancy had double digits. It means that our double-digit vacancy. Today, the demand goes to the CBD, this is what we have been capture this outperformance letting activity. Half of this letting activity has been new lettings, new contracts. And this does not happen in the secondary. So this is a fact and evidence that this polarization, today, is happening and it's, I would say, accelerating. And the result of that is double-digit vacancy in the secondary, GAV decreases in secondary locations and especially for non-retail assets.

I think that's super interesting. Just I guess, just finally on that then. So is there a sort of return premium that you would expect to tempt you into more secondary locations outside of the CBD. Do you think of it in terms of a premium to attach and there a number there?

No. I mean, look, we -- for example, in historical terms, I would I would -- maybe I'm not answering you, but in a way I'm trying to approach. We were looking for, on average, 10 years IRRs of 6% for stabilized assets. Whereas for value-added kind of products, our expected IRR could go from 7% to 10% depending on the risk. But usually, as you can see in our pipeline, our approach was, "Okay, we are taking some risk, commercial risk, leasing risk, development risk or whatever. But the final outcome that we get of our effort is a prime product." So that the outcome is an asset equivalent to what we own in our stabilized portfolio. And therefore, that's why our pipeline, sometimes, we call it the Prime Factory. So we are, let's say, we try to be professional and sophisticated in anything we do. And we can assess risks and provide premiums and maybe can be 100 basis points, 200, 300, depending on the nature. But usually, we will not be tempted by riskier assets in secondary locations. We would prefer to remain with a cool mind and wait for this kind of alternative investment opportunities where the outcome, the final outcome is a kind of asset more consistent with what we do on a normal basis that is more prime.

I just guess from my perspective, as I look out, I think, perhaps, it's physical quality and attributes that maybe has the slighter upper hand to pure locations. So different elements of quality, but over time, that's really what people are looking for, maybe over and above just the CBD.

Well, let's say that our concept is mainly prime, the concept that we will use. And that, of course, is not only related to location. It's related to experience. But they are part of the experience that you can deliver if you do the right work in any building, regardless of what it is. But there are things that are very difficult to deliver if the expression you are in the middle of nowhere. We've done a number of research with our own clients. There is, for example, in SFL, a very interesting research, which is called Paris Workplace, where they ask several thousands of clients what do they like of the product, of the clients. And on the top, there's always commuting. That's very simple, but it's always there. And the second is what is beyond the walls of where I am? Besides a beautiful building, what can I do when I go through the door before when I get to the door, what kind of exciting experiences we have around me? And that usually comes second in what they want. So yes, you can provide part of the experience that prime means regardless of locations, but there are other things that are difficult to provide in other locations. That is not a general rule. There can be exceptions to the rule, but that's more or less our thoughts on this.

Thank you very much. There are no further questions in today's conference. Dear speakers, the floor is yours.

Just to thank you everybody for the patience at this hour of the day and day of the month. So most of all. So thank you all and those of you who go on vacation have a good time And I hope to see you soon again. Thank you. Bye-bye.